The dangers of increasing the minimum wage
Kiwi Pundit reports this warning from Obama’s State Department:
In January, Honduran President Manuel Zelaya increased the minimum wage 60 percent, raising monthly wages from US$ 181 to $289. As a result, an estimated 15,000 people have been laid off in urban areas. This number is expected to steadily increase as businesses cannot afford the new mandatory wages. Remittances from Hondurans in the U.S. have also decreased throughout 2008.
Some analysts predict increased crime in Honduras due to citizens unable to find legitimate sources of income. Many unemployed Hondurans could look to kidnapping for ransom in order to obtain large sums of money for a small amount of planning and effort. As the disparity between economic classes continues, wealthy Hondurans or foreigners of affluent appearance conducting business in Honduras could continue to be targeted at a higher rate.
May that serve as a lesson for those who think you can make everyone richer simply by increasing the minimum wage.
March 11th, 2009 at 12:10 pm
Micky Savage just won’t understand the concept at all.
NZ Minimum Wage in his world should be 100% more. That will help the lower paid and stimulate the economy nicely.
Of how about a 3 or 4 day working week, and an extra weeks holiday, so they can get out and enjoy the money.
Seems sensible.
It has failed everywhere else, but we are a very rich country and can afford it.
March 11th, 2009 at 12:45 pm
“May that serve as a lesson for those who think you can make everyone richer simply by increasing the minimum wage.”
Really just another form of welfare, and like all welfare, counterproductive to an effective prosperous and functional society.
(and a disincentive to voluntary social generosity)
March 11th, 2009 at 12:51 pm
Governments obviously have to take account of the ability of businesses to absorb the costs of increasing the minimum wage. A 60% increase in Honduras, given the current state of the international economy, is just ridiculous, and made large-scale layoffs inevitable there.
But the vast majority of businesses here could cope with more than the miserly 4.2% increase in New Zealand’s minimum wage that occurs next month, and Government could have put in some transitional support programmes to assist businesses that could not.
[DPF: Have you not noticed all these businesses laying staff off? And you want them laying more staff off?]
March 11th, 2009 at 1:00 pm
Eric Crampton has some more thoughts on this here.
Toad, fundamentally it is not the size of the increase that causes unemployment but the fact that there is a minimum threshold that makes some people unemployable at that wage. Miserly increase or not, NZ’s minimum wage is still hitting the poor in the same way, and possibly to a greater though less obvious extent, as it does in Honduras.
March 11th, 2009 at 1:02 pm
toad, so by endorsing a more ‘modest’ increase are you also endorsing a more modest increase in layoffs, crime etc?
… paid for, of course and as always, by those businesses and individuals that are productive. This socialist drive towards lowest common denominator productivity is just a mechanism to disempower individuals and give the state more control over our lives
March 11th, 2009 at 1:04 pm
Always with the the third world nutters thinking the government can snap their fingers and make it so. Same kind of mentality as when they print more money to solve an economic crisis.
March 11th, 2009 at 1:35 pm
I would not add anything to the above comments other than to advise Toad to listen to his intellectual betters and learn from both historical and observable real world reality, and the conclusions that his intellectual betters draw from them.
Even 4.2% is enough to make a difference when the economic conditions already have large numbers of businesses on the edge and increasing numbers of them going over it.
March 11th, 2009 at 1:40 pm
From the Crampton link:
Apparently, this follows a 2007 reduction in the minimum wage from $178 to $136 per month.
strange lot
March 11th, 2009 at 1:46 pm
Put it away (179) 2 0 Says:
March 11th, 2009 at 1:04 pm
“Always with the the third world nutters thinking the government can snap their fingers and make it so. Same kind of mentality as when they print more money to solve an economic crisis.”
Yes, but tragically this mentality does not just affect third world nutters. It affects a majority of the dumbed down people of the post-christian, post-moral, post-rational West; which is consequently on its way to becoming “third world”. How many truly economically savvy people get elected to positions of power these days? The era of Reagan and Thatcher and Lange/Douglas, was a belated and brief miracle. The ruination done in this latest round of brute ignorance and socialism will be terminal.
OK, we could do worse than the government we’ve got. It is a tragedy that we did not get Don Brash and Rodney Hide running NZ from 2005 onwards. They would have actually done a lot MORE to turn NZ around, and a lot earlier in its downward spiral.
March 11th, 2009 at 1:55 pm
Which would you prefer – raising the minimum wage or setting a maximum wage? (Assume that “neither” was not an option.)
March 11th, 2009 at 2:07 pm
You’d have to know the numbers involved, however in most practical circumstances raising the minimum wage is the better option, because all that does is drive off the least productive, rather than the most productive.
Third world?
Google “Gordon Brown” and “Quantitative Easing”.
Yes, you heard right, Britain is actively engaging in Mugabenomics to boost itself out of recession.
Up is down. Left is right. Freedom is slavery. Printing money makes us wealthier. Down with Goldstein. Long live Ingsoc!
March 11th, 2009 at 2:12 pm
so..dpf..still standing behind nationals’ record last time in power..eh..?
..with an 83cent increase in nine years..
..and that only because peters screwed it out of you..?
..and more of the same..eh..?..would be your prescription..?
..but lots more tax cuts/government handouts for the likes of you being an imperative..eh..?
..ya gotta keep that boot on the working class kneck..eh dpf..?
..they might get ‘uppity’..if given economic freedom/a fair deal..eh..?
..and you aren’t engaging in class warfare..?..eh..?..mr farrar..?
..and hey..!..you have set a new benchmark in strawman arguments there dpf..
..so..a decent increase in the basic wage…would set off a crime wave/turn new zealanders into kidnappers..?..eh..?
..yagottalaff..!
..eh..?
..even you..!
phil(whoar.co.nz)
March 11th, 2009 at 2:13 pm
So the minimum wage increases and the least productive get laid off, but if the maximum wage exists/decreases, it drives off the highest earners (who are therefore the most productive)?
March 11th, 2009 at 2:16 pm
That would appear to be the case, but as I said, you’d need to know numbers.
If the maximum wage is so high that only one person in NZ gets driven off, that certainly wouldn’t be as bad economically as a minimum wage increase of $400/hour.
However, in most realistic examples (i.e. a max cap of say $300k and a minimum wage rise of 5%) you’re better off raising the min wage.
However, “neither” is definitely the best option by a long shot
March 11th, 2009 at 2:17 pm
Are the people who get paid the most really the most productive?
March 11th, 2009 at 2:24 pm
Phool
Who the fuck do you think you are?, you have no right to speak on behalf of the working class or working people.
These are the same working class and working people you steal from every week and have done so for year after year.
You are the last person they would want speaking on their behalf, you are scum and a man who bludges from those who can afford it the least.
March 11th, 2009 at 2:25 pm
“Are the people who get paid the most really the most productive?”
As long as they are in the private sector that question answers itself.
March 11th, 2009 at 2:27 pm
Because if they weren’t providing value commensurate with their pay, they would either work somewhere else (providing more value) or the company would go under (providing less value) or at least run at a loss until they were replaced. Right?
March 11th, 2009 at 2:27 pm
There seems to be a myth that extra productivity always leads to wage rises.
I notice that government is looking at putting rigs up to sixty or sixty five tonne gross weight.
If any one believes that will lead to the drivers getting the same rise as the extra productivity in percentage terms I have a bridge to sell to that person.
What people forget is competition tends to drop prices.
Of course the road transport industry would be better off as a mini Standard Oil of the 1905 version.
March 11th, 2009 at 2:53 pm
Yes that’s right GOH. For some jobs, it doesn’t matter how fast a man works, the work will not become more valuable until he’s replaced by a machine or similar that can lift production well past human effort or his type of work is simply listed as obsolete. Some jobs will never require the employee to work smarter – it will be too inefficient.
March 11th, 2009 at 3:41 pm
There isn’t much empirical evidence that raising the minimum wage raises unemployment. It’s standard economic theory of course, because when the cost of something (wages) goes up, the assumption is that people (employers) will use less of it.
But there are other things to consider. Raising wages can increase the wage share of the economy, and increase consumption (with employment-increasing flow-on effects).
It increases the attractiveness of paid work relative to other alternatives. This effect should not be understated (National and Labour caused this effect by cutting unemployment benefits to poverty levels – try living on $180pw)
It increases productivity by increasing the cost of labour relative to capital, significantly increasing the incentive to invest in capital intensive labour saving devices rather than persisting with cheap labour.
The empirical literature shows that moderate increases in the minimum wage have negligible effects on employment.
60% in one year is just crazy though. If you’re going to do that, why not just have a revolution and take complete control of the economy?
March 11th, 2009 at 4:02 pm
The concept of a maximum wage is bizarre.
How would that ever be policed?
What a weird argument.
Business Owners could keep the profits in the business. Send the money overseas. Buy a Yacht through a subsidiary. Pay family members. The dog and Cat.
Expense everything through the business. Set up multiple consultancies. The list is endless. Or more understandably pay themselves in dividends.
Looks like some people here have no idea what hey are talking about. At all.
March 11th, 2009 at 4:04 pm
“But there are other things to consider. Raising wages can increase the wage share of the economy, and increase consumption (with employment-increasing flow-on effects).”
Would only really have a signigicant impact if the goods purchased with the rise in the minimum wage came from companies paying the minimum wage. Because the proportion of companies employing at the minimum wage is really very small, it is very unlikely that an increase in the minimum wage will have feed through to those businesses. So essentially what you would be doing is taking from the businesses that pay the minimum wage, and spread that wealth across the entire economy, returning a small amount back to the original business incurring the cost.
“It increases the attractiveness of paid work relative to other alternatives.”
That is a solid argument. It is logical that a minimum wage should help reduce crime.
“(National and Labour caused this effect by cutting unemployment benefits to poverty levels – try living on $180pw)”
Add in the accomodation supplement and the other benefits available to get a better picture of how much an unemployed person receives to live on. The unemployment benefit needs to be harsh to increase the attractiveness of being employed.
“It increases productivity by increasing the cost of labour relative to capital…”
False economy.
“The empirical literature shows that moderate increases in the minimum wage have negligible effects on employment.”
That is seen. But what is unseen? Besides, you can boil a frog with very small increases in temperature. A small increase in the minimum wage will not have a large impact because it isnt felt sharply enough. But to argue, as some have, that this means that the minimum wage has no relation to employment is silly.
March 11th, 2009 at 5:03 pm
May that serve as a lesson that increasing the minimum wage MASSIVELY would kill every business that employs a large proportion of its workforce at the minimum wage…?
I don’t think anyone has suggested a 60% increase in the NZ minimum wage have they?
[DPF: Over time yes. Labour says there should be an immediate 25% increase despite the recession]
March 11th, 2009 at 5:05 pm
Glutae
“Pay family members. The dog…”
So you have met my “security consultant” have you?
March 11th, 2009 at 6:21 pm
Why do we need a minimum wage at all in NZ if we have a welfare state? The unemployment benefit is a de facto minimum wage, because no one in the right mind will work for less.
March 11th, 2009 at 7:22 pm
[DPF: Over time yes. Labour says there should be an immediate 25% increase despite the recession]
Um, no, they didn’t.
The Greens did call for 25% from NZ’s low wages (phased over 3 years, so 8%pa), despite the economic downturn, but not Labour.
21st October 2008:
Anyway, what I wanted to refer to was this
The rest of the wage economy is sensitive to the minimum wage. Raise the minimum wage, and the relative attractiveness of wages above it decreases – when the minimum wage is $7 then $14 per hour seems reasonable. When the minimum is $12 then you’re going to want $16. Raising the minimum wage has flow on effects on a very large number of workers, until you get suitably far from the minimum. Under Labour the share of the economy in wages increased substantially (more money in workers pockets), and the significant minimum wage rises
Now, once you do this you start to worry about inflation of course, but low inflation and high minimum wages can be maintained simultaneously. Denmark for example has effective minimum wages equivalent to about NZD$28, with inflation of 2%, and unemployment at 2.3% this quarter. A counterexample if ever there was one.
I’m all for economic theory, but I demand empirical evidence rather than being asked to ‘assume’ that all things hold equal.
March 11th, 2009 at 8:00 pm
georgedarroch: The rest of the wage economy is sensitive to the minimum wage. Raise the minimum wage, and the relative attractiveness of wages above it decreases
Not really. The relatively high minimum wage in NZ has a depressing effect on wages, because many wages are set relative to the minimum wage. If there was no minimum wage, many jobs would pay market rates, as you can no longer tell people it’s so much above the minimum wage.
I think if we abolish the minimum wage we would see higher employment among the lowest skilled, and the wages at the bottom for fairly high skills (nurses) would rise significantly.
But the first reason is the main one of course: we would to create more jobs at the bottom. As the lefties never tell you: minimum wage jobs are entry jobs. People don’t feed a family from the minimum wage. They get paid the minimum wage if they haven’t had a job before. By giving people work experience they can move on to higher paying jobs.
But that’s the biggest problem the left have: that people might improve their lives themselves.
March 11th, 2009 at 8:15 pm
Judging from the current state of the USA I would suggest the highest earners are the least productive, except for talking shareholders in paying them … namely the bankers.
March 11th, 2009 at 8:41 pm
That ain’t true. Growing up, my parents earned the minimum wage or pretty close to it for decades. I knew plenty of other kids with parents in the same situation. There are 120,000 on the minimum wage at present. I know of people who’ve worked a fair number of jobs who don’t earn more than $12.50, including a whole bunch of Spotless Services people who went on strike recently. Sure, may not be attractive to many employers, but they’re real people who aren’t 17.
Sure most people can get past that, but there are plenty of people who have to choose between the minimum wage and unemployment – for whatever reason they’re not able to get a job above that.
As for those just above it, that’s over 300,000 NZers, more than 10% of the workforce. Their quality of life is directly affected by minimum wage increases.
March 11th, 2009 at 9:58 pm
“Raising the minimum wage has flow on effects on a very large number of workers, until you get suitably far from the minimum.”
Which will feed inflation as you acknowledged but then dismissed. In a perfectly closed system you will not end up with any real gain as the entire increase in wages will be offset by increased prices. In an open system, as in NZ, the impact of an increase in the minimum wage on domestic inflation can be muted through the import of the cheap foreign goods. Of course, the international competitiveness of the local industries will be damaged as our goods will cost more. Demand for domestic production will decrease and therefore the demand for labour (Labour?) will also decrease.
There could be any number good reasons why Denmark was able to produce the stats they did. The composition of their industries might be one; they could have a high tech bias for example. In any case, merely stating that they have been able to have a very high minimum wage right now without very high inflation does not disprove the relationship between the two. When did they increase the minimum wage anyway? Did it result in inflation at the time?
“I’m all for economic theory, but I demand empirical evidence rather than being asked to ‘assume’ that all things hold equal.”
Then you will continue to confuse correlation and causation. Personally I prefer logic and reason. If the empirical evidence shows something different to what logic and reason demand, then that is something demanding further investigation. But I have seen too many flawed and biased studies to automatically give empirical evidence a free pass or more credence than a good, robust theory.
The assumption that all else holds equal is merely a device used to help illustrate a particular relationship within a complex system. Economists all know that holding all else equal is impossible, but they also know that while it might be impossible to understand a complex system such as the national economy in its entirety, it is certainly impossible to explain it to another person.
Often when someone resorts to demanding empirical evidence, it is because either their own theory cannot be argued on the basis of logic or they are incapable of doing so. I am not saying you are doing that, it is just something i have noticed over the years.
BTW this site looks awesome:
http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=DKK
March 12th, 2009 at 10:50 am
“Sure most people can get past that, but there are plenty of people who have to choose between the minimum wage and unemployment – for whatever reason they’re not able to get a job above that.”
I really would like to see an investigation of this: how many people are on the minimum wage for extended periods of time. Just because there are currently 120,000 on a minimum wage, and there was 120,000 on the minimum wage 5 years ago, doesnt mean it is the same people.
I would also point out that if the minimum wage was raised by $4 there would be a lot more people earning it. So trying to use the number of people on the minimum wage as a kind of emotional justification to increase it is, therefore, circular reasoning.
March 12th, 2009 at 11:35 am
berend said..
“..The relatively high minimum wage in NZ has a depressing effect on wages..”
um..!..which oecd countries is our minimum wage ‘relatively high’ against..?
..or are you relying on comparisons with third world countries..?
..and..
..were you ‘with’ key when..pre-election..he conned the votes of the reef-fish..?
..with his patently-false promises ‘to close the wage gap with australia’..?
(remember that whopper..?..)
phil(whoar.co.nz)